Mozambique: IMF decision is critical

The IMF was in Mozambique last week to decide its role in the future of Mozambique. Last year the IMF loaned the country $286m as investors retreated in the face of plunging commodity prices.

The fate of Mozambique hangs in the balance and the decision really could go either way. But how did the darling of SSA (Sub Saharan Africa) fall from such spectacular heights?

Until very recently Mozambique was the star performer in SSA, with growth averaging above 7% per annum for almost a decade. An incredible growth story driven by mining and oil and gas exploration, a diverse commodity base and a stalwart aluminium smelter mega project (Mozal), attracted global names such as BHP Billiton, Vale and Rio Tinto to name a few and energy companies including Sasol, Anadarko, Eni and the electricity hungry South Africa’s Eskom.

Despite poor infrastructure, a railway that was destroyed in the war and ports that required dredging and building, investment continued to flow into Mozambique’s extractive industries and all the while the sidelined opposition, Renamo, cried “foul play.”

However in 2015 the commodity cycle finally turned…..

By June 2016:

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o a rapidly weakening currency

o very little foreign currency available

o More than one billion US dollars of undisclosed debt

o Donor funding cut

o IMF funding cut

o Double digit inflation

o Increased Renamo mobilisation

o Refugees fleeing

o And social and political strife

What does this mean for the mining and oil and gas sectors?

There are certainly easier countries in which to mine in SSA, with attractive reserves, better infrastructure and far less turmoil – Tanzania, Ghana, Namibia, Botswana and Uganda come to mind. But the appeal of Mozambique remains – abundant resources, a +3000km coastline supporting West to East corridors and a resilient albeit impoverished population.

Yet Mozambique is at a crossroads – the socioeconomic and political will either improve soon or become a lot worse…

And the catalysts are the following:
1. Commodity prices
2. IMF support
3. Donor support
2. and 3. depending on government’s cooperation in respect of the undeclared loans, transparency and an agreed fiscal and economic roadmap for the future.

Good sense tell us that everything is going to be okay, but good sense has been wrong before.

Assuming that the IMF meeting has a positive outcome, then Mozambique should realise increased foreign direct investment into its extractive sectors. Oil prices are increasing and are now at around $46/bbl, a far cry from previous highs but at least it’s going in the right direction. The coking coal sector should be depressed for another decade owing to surplus steel stocks, but Mozambique also has niche commodities including tantalum, graphite and bauxite.

If however the IMF refuses to finance the Mozambique government, then Mozambique will begin to experience severe capital flight and we suspect that it would be years, perhaps more than two decades before these deposits are developed.